Bankrupt Budapest? European Commission turns screws on Hungary

Deutsche Welle, 12 January 2012

Whether it's euros or forints, cash is
short and debts are high

EU member Hungary may not use the euro, but it's still fighting a deficit well beyond European limits. The European Commission has taken note and is threatening sanctions, unless Viktor Orban's government turns the tide.

The European Commission announced on Wednesday that Hungary has not done enough to bring its deficits back in line with EU targets, threatening that the funding Hungary receives from the EU could be at risk as a result.

Olli Rehn, European Commissioner for economic and monetary affairs, did not hide his displeasure with Viktor Orban's government, saying that it was forever promising Brussels that it would change its ways.

"As Hungary is not a member of the euro, it won't face the prospect of a financial sanction under the 'Six Pack,' " Rehn said, referring to a string of measures presented to control eurozone deficits in September 2010. "It could nevertheless face a suspension of commitments from the cohesion fund from next year."

Finnish European Commissioner

Olli Rehn pulled no punches

The cohesion fund provides money to the EU's poorer members for infrastructure projects; in 2010, the last year for which records are available, the country received roughly 2 billion euros ($2.5 billion) of the 37 billion paid out in total.

Such a sanction, if implemented, would be unprecedented in EU history.

Cooking the books

Hungary was one of very few EU countries to post an annual deficit of less than 3 percent of GDP in 2011 - making it, at first glance, one of the better-behaved members of the bloc.

Olli Rehn pointed out that this figure was only achieved thanks to a string of one-time moves, including a transfer of private pension funds to the state.

"Without these one-off measures, the deficit last year would have reached 6 percent of GDP," Rehn said.

By finding Hungary in breach of deficit requirements, the European Commission may make it more difficult for the country to secure emergency loans from the International Monetary Fund as well. These talks have just restarted after a lengthy pause, and Hungary needs the money urgently to stave off insolvency. The IMF froze the talks, citing concerns over new rules governing the Hungarian Central Bank - rules that were deemed to call the lender's independence into question.

Political pressure?

The Commission might also seek a two-pronged attack on Orban's government; it refused on Wednesday to rule out an investigation into whether the country had breached the rules of EU membership.

Hungary's new laws have courted
public disapproval

"The Commission is committed to fully use all its powers to analyze the compatibility of national law with EU law and reserves the right to take any steps that it deems appropriate; namely the possibility of launching infringement procedures pursuant to Article 258 of the treaty," EU Commission spokeswoman Pia Ahrenkilde said.

Article 258 pertains to investigating whether legislation changes in EU countries are valid and fairly implemented, with the European Court of Justice designated as an arbiter in such cases.

In this case, a trial would concern last year's controversial changes to Hungary's central bank, as well as a string of other new laws ushered in at the start of the year as part of a new constitution. The EU believes that one specific change - the sudden reduction of the retirement age of judges from 70 to 62 - was introduced so as to put certain undesired constitutional court judges out to pasture.

According to sources within the Commission, infringement procedures could be launched next Tuesday unless Hungary shows signs of change.

Alexander Graf Lambsdorff, a German member of the European parliament for the pro-business FDP, said that even these possible measures would not go far enough. Instead, he advocated "concrete sanctions against Hungary including revoking its right to vote at the European Council."

The Hungarian Economics Ministry released a short statement in Budapest on Wednesday, saying Orban's government would "correct the mistakes of the past."

"Therefore we will continue down the path to sinking the state debt and limiting the budget deficit to a value of less than 3 percent [of GDP]," it read.

Author: Cai Rienäcker, Brussels / msh (AFP, dpa)

Editor: Nancy Isenson